Real estate has its first green building ETF. What next?
As demand rises for green-focused investment vehicles, more work is needed to make sure buildings hit the mark
The launch of the world’s first equities investment vehicle targeting property companies specializing and supporting green buildings is pointing the way for more sustainable investment platforms.
Global investment manager Invesco has launched a green exchange traded fund (ETF) in New York at a time of increasing appetite for sustainable investments, with 77 percent of institutional investors planning to stop investing in non-ESG (Environment Social Governance) products by 2022, according to PwC.
The ETF, which will track MSCI’s Global Green Building Index, will pick stocks in companies that invest in buildings with high energy efficiency, a healthier indoor environmental quality and make use of environmentally friendlier construction materials.
While Invesco has not named the companies the ETF will target, Boston Properties, Unibail-Rodamco-Westfield and GPT Group are among the 73 real estate investment trusts (REITs) in MSCI’s index, which since November 2008 has slightly edged MSCI’s World index.
Still, in order to succeed, more green buildings are needed.
Making buildings green
The challenge for all countries is to upgrade existing buildings to meet standards required by vehicles like the new ETF. Allianz Real Estate just announced plans to upgrade 57 of its 500 directly held assets as it looks to reduce its global carbon emissions by a quarter by 2025. Around 75 percent of European Union building stock is energy inefficient, according to EU figures.
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The real estate industry’s ability to deliver greener buildings – mainly through retrofitting of existing assets – is crucial, says Ali Ingram, director and sustainability lead in JLL’s European office investment team. In New York, retrofitting 50,000 buildings over the next decade could cost owners between US$16.6 billion and US$24.3 billion, according to New York‘s Urban Green Council.
“It’s great that vehicles such as Invesco’s ETF will not only concentrate on real estate companies but also on companies focused on retrofitting existing buildings and those who are innovating,” Ingram says. “To meet climate objectives, the rate of building renovations will need to at least double.
“It’s the biggest challenge faced by the sector today as it looks to maintain its attraction to investors and chase down net-zero goals,” she says.
There are other green investment vehicles emerging, too. In France, asset manager VIA AM launched a carbon-neutral share class to compensate for the greenhouse emissions of companies in its portfolio through carbon offsetting. Foresight Capital Management last year created a Sustainable Real Estate Securities Fund focused on listed REITs with assets in Europe, North America and Asia.
Against a wider backdrop of more sustainable ETFs and demand for green products, more real estate-focused investment vehicles are likely to emerge, says Christian Denny, EMEA Capital Markets Research & Strategy director at JLL.
“The demand for such vehicles has been there for some time,” he says. “The area for catch-up is in knowledge and familiarity with green-focused investment strategies.”
Increasing regulatory requirements are helping to keep up momentum. In Europe, Sustainable Finance Disclosure Regulation (SFDR) recently came into play, putting binding ESG disclosure obligations in place for investors putting capital into Europe or funds marketing there. At the same time, from January 2022, forthcoming EU Taxonomy, a classification guideline, will allow funds and investment vehicles promoted as environmentally friendly to state how much of their portfolio is aligned.
“The regulatory side alone has created more urgency among both investors and investment managers,” says Denny. “And now we seeing the listed sector respond with tailored, targeted vehicles.”
More broadly, asset managers are upping their game. Backed by the likes of Nuveen and Vanguard, a Net Zero Asset Managers coalition now represents more than a third of all global assets under management pledging to reach net-zero carbon emissions by 2050. Within the real estate sector, the UK’s Building Better Partnership’s Climate Change Commitment was last year signed by 23 commercial real estate owners, including LGIM Real Assets and LaSalle Investment Management.
Identifying the property stocks and equities that can be truly regarded as green will be a challenge, but less so than a couple of years ago, says Denny.
“Clearer definitions of green will be needed,” he says. “And such is the trajectory that broader ESG-focused investing is on, the need to deliver green buildings will become even more pertinent.”
Kontaktperson Ali IngramDirector and sustainability lead in JLL’s European office investment team
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